The Eurozone crisis began as early as 2005. The problems were mostly related to internal economic problems mainly low productivity. The crisis took a plunge in 2008 as many financial institutions in the US—like Lehmann Brothers—collapsed. Many governments and banks lost their investments in these institutions. In turn, these governments and banks began to fail in paying for their own loans. Because they were unable to pay their debt, they could not find any source of funding so entire economies.
The economic crisis was not solely the result purely of the collapse of financial institutions. Some economies—like Greece’s—had become uncompetitive and unproductive. The government had been spending to support its people’s standard of living without generating the necessary revenues. Other countries—like Germany—seem to have not been affected by the crisis because of its sound and austere economic policies.
The solution to the crisis cannot be addressed by debt and financial restructuring alone. It would require certain radical changes in economic policies. In resolving the crisis, three financial institutions are playing important roles: the International Monetary Fund, the European Commission and the European Central Bank.
The International Monetary Fund
The International Monetary Fund (IMF) was founded after World War II to help nations rebuild from destruction or any similar problems. Countries pool their resources or money together and lend these to ailing economies.
Governments may borrow money from the private sector or private banks. However, in times of crisis, governments may not be able to borrow from these sectors. For one thing, they already have existing and unpaid loans so they are already, in a sense, blacklisted. So, they have to borrow from other sources like the other governments or international agencies like the IMF and World Bank.
The IMF functions somewhat like a bank in that it lends money to help countries recover from crisis. Depending on the agreements, it would charge corresponding interests on its loans. More importantly, it sets certain conditions before it lends money to any country. These conditions are “advisory” or “consultancy” in nature but have the effect of an imposition. After all IMF does not have any authority or sovereignty to implement these conditions as these refer mainly to government policies. In the Eurozone, it is up to the European Commission and the individual governments to implement the policy changes so the borrower could meet the set conditions. While these conditions are mainly advice, they have the effect of policy decisions already. Understandably, countries would not be able to get their loans if they do not agree to the conditions. Ailing economies in the Eurozone would not really have much choice. They do not have any internal resources nor could they borrow from other countries as these are also suffering from the crisis. The IMF would be the only institution around that could help these countries. Besides, the IMF releases its debt package in tranches at given periods in time. The country will be monitored on its compliance with the conditions and attainment of targets.
With regard to the Eurozone, the IMF’s role is mainly of money-lender, policy adviser and budget controller.
The IMF has so far given the biggest aid in its history to some Eurozone countries. It has pledged US$130 billion to help Greece, Portugal and Ireland. It has offered €30 (or US$37) to rescue Greece alone in 2010. These IMF moves have been a source of concern for member countries outside the Eurozone. It is perceived as too much as these loans may not be recoverable given these countries may not have the capability to pay.
As always, the IMF has set conditions to ensure that these loans should be paid. Otherwise, these loans might be used to pay maturing loans from the private sector and other countries, or welfare, and none left development. IMF has to make sure that the loans are used for economic recovery. IMF thus imposes such conditions as austerity measures like cuts in government spending on non-productive or non-yielding expenditures especially on social benefits and welfare. It also requires strict adherence to certain fiscal and monetary policies that would help the countries manage its inflation and interest rates. In this context, the IMF functions both as an adviser and a budget controller.
The conditions are not set by IMF alone. They are set with the agreement of the entire European Union through the European Commission. With regard to Greece, many of the conditions cover government spending especially on investment expenditure, government bonuses, and welfare. Greece will also have to try raise revenues by way of increasing taxes on certain economic activities and production. Taxes on alcohol and cigarettes will have to be raised.
Very recently, in February 2013, the IMF has again stepped in to help Italy. It was trying to impose certain conditions on Italy before it releases its loan. However, these conditions were rejected by the Italian population as what happened in Greece in the early phase of the negotiations.
The European Commission
The European Commission (EC) is the body governing the entire European Union. It does not act like the sovereign government of the individual countries. Rather, it attempts to provide a semblance of unity especially with regard to economic policies and other laws among the member countries. It is composed of members representing the different countries of the European Union.
The EC has four main functions. First, it proposes new laws to Parliament and Council. Second, it manages and allocates the EU budget and funds. Third, it makes sure that EU laws are enforced in the different member countries. Fourth, it represents EU as a group to and negotiates agreements with international bodies and other countries.
All these defined functions of the EC came into play in the negotiations for loan packages for the ailing economies in the Union. After all, the Eurozone debt crisis is problem that individual member country will not be able to solve on its own. Unaffected countries will need to cooperate to shield itself from the effects of the crisis. It is as a group that negotiates for aid with such institutions as the IMF for aid to individual countries like Greece and Italy.
Before the EU approaches any foreign institution for help, it has to rely on its own internal resources. It has its own budget and funds provided by the member countries. Usually, it is the better-off countries that offer loan to problematic economies. Germany has so far played a prominent role in helping the other countries. After all, it is one of the few countries that had not been severely affected by the crisis. It even showed some economic growth during the period. As with any lending country or institution, Germany would of course set its own conditions. Usually, these are in the form of policy changes in the borrowing country’s government. These conditions are coursed through the EC which agrees upon how to and help the country implement the conditions.
In dealing with the IMF, the EC acted as the negotiating body for the countries needing aid. The EC is the body that would guarantee that a borrowing country would comply with the IMF conditions. It has the power to create policies and sanctions that countries need to abide by to be a part of the Union. It does not have the power to actually implement policy changes individual countries as it is not have that authority of sovereignty. Every country would have still have its individual constitutions and thus need to legislate certain policies to be legislated to take effect.
Its impact on individual countries seems to be mainly with regard to budget allocations and aid . However, it does seem to have a very strong influence over a country when it rejects or refuses to follow measures imposed upon it for economic recovery. For instance, the EC seems to have been very influential in the changes of government in Greece and Italy although these were developments that happened within the context of these countries laws.
The EC role in the Eurozone crisis also involved imposing certain law and policy changes on the borrowing countries. This role seem to largely involve budget allocation and taxation. Based on the IMF conditions, it guides countries on where to cut its budgets especially with regard to government new investment, social benefits and welfare and government service bonuses and incentives. All of these are aimed to help the borrowing country not only to be able its previous and current debts but also to start improving its productivity and begin its economic recovery.
Among its most important directions in helping countries recover is by way of austerity measures: cutting and saving on costs so countries would have adequate funds for recovery.
The European Central Bank
The European Central Bank (ECB) has a very straightforward and limited role in the Eurozone crisis. As with any other central bank in the world, its chief functions were to ensure that it has money in its coffers, manage the money supply in the market, and keep prices and interest rates stable. The ECB is said to have been successful in its main objective of stabilizing prices and controlling inflation which averaged about 2%. It is lower than in any developed country. The ECB has also been described as one of the best in the world. Given its success, the ECB does not seem to have been any source of problems related to the Eurozone crisis.
The ECB did not seem to play a crucial role in helping out Greece. The package did not seem to include any measures that required to take any actions beyond what it is already doing. So, its chief function in the crisis is to maintain what it is already accomplishing: keep inflation down.
Some research studies try to pin some of the blame on the ECB. The ECB had been very restrictive and it was thus successful in achieving its goals related to inflation. However, its policies could have contributed in the contraction of certain economies. Most studies seem to dispute this observation.
While the ECB did not have to take any drastic measures, it still plays a pivotal role in the crisis. It is after all the keeper of the Union’s money.
Aside from stabilizing inflation in the region, the ECB in Italy, Greece, Spain, Portugal and Ireland issued crisis bonds worth €208 billion to support economic reform programs. While the funds raised from the bonds are not enough to bail out some countries from their economic woes, the move seems to be succeeding. The ECB already earned about €1.1 billion in interests. Apparently, the reforms imposed by the IMF and implemented by EC are working. The countries are slowly able to pay their debt that the ECB was able to reflect income from interests.
Since 2009, the ECB has been cutting interest rates. In March 2013, the ECB announced that it would make further cuts in interest rates. Bank lending rates have been at about 2%. ECB plans to bring this down further to less than that rate.
ECB’s interest rate policies seem to have succeeded in bringing down inflation. However, they did not seem to have stimulated investments as loans from banks had continued to decline. This means that businesses are not borrowing money to invest. Growth seems to be largely coming from savings as consumers and businesses cut on their expenditures.
Pivotal Roles of EC, ECB and IMF
The IMF, the EC and the ECB cannot individually solve the problems related to the Eurozone crisis. They have to work together in order to achieve a singular goal: economic recovery. Their roles overlap but it is in the implementation where they differ. Mainly their roles include providing funds to the needful countries, developing policies to guide the countries in their recovery, and budget control. The IMF cannot implement any of these policies which it usually recommends. Only the EC and the ECB could do that. However, the IMF way of ensuring that agreements and conditions are followed is by way of its releasing the funds.
The EC implements policies in the areas of its concern: budgets and legislation. It has to enforce its agreements and policies on member countries. Since it holds a budget that are distributed to member countries, it can control a country’s expenditures by limiting certain allocations for expenditures. It can also impose sanctions (cutting off of budget altogether for instance) if a country does not set up required policies (like raising certain taxes) as it did in Greece.
Meanwhile, the ECB is role is to provide mainly financial stability within the affected country and the entire community. It has to ensure that certain funds are available which it has to raise by way of borrowing or other means (bonds). It also has to ensure that the money supply in the market is adequate to keep the economy working and inflation, interest rates and prices are stable all over the Union.
The economic reforms would not likely have been undertaken without the three institutions’ intervention. The ailing countries certainly would not have been able to raise the needed funds from within their countries. Given their near-bankrupt situation, neither would have they been in a position to negotiate with the IMF
While many measures being undertaken by the three institutions can be severe and hurt consumers, they are necessary in the long term. People will just have to make sacrifices and undergo austerity measures for the Eurozone economy to recover. The economic crisis after all has its roots in the wasteful use of funds to protect a high standard of living without the right sources or productivity. The rigid policies being undertaken by the three institutions seem to be in the right direction and hopefully would work in a shorter time.
Conclusion
The EC, ECB and IMF can only do so much to help countries like Greece, Ireland, Italy, Portugal and Spain. Their policies could only tackle economic variables. Real recovery can come only from real reforms not only in the economics in a country but with people’s attitude and behavior. Germany has survived and thrived in the crisis. It was able to do so not because of economic policies (which was practically the same all over the Eurozone), but because its people had been willing to undergo austerity measures and even wage cuts. This was a result not of economic policies but of agreements between the government and its people.
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